What will changes to the defined benefit rules mean to pensions?
Donna is unsure how the changes to the Centrelink rules regarding defined benefit schemes will affect her Age Pension.
Like many retirees I received a Centrelink letter last week about the Government’s changes to defined benefit schemes that said they will be capped at 10 percent from 1 January 2016, but it does not really tell you who is affected and why.
I have googled it, and rung Centrelink and my super fund, but I get vague and different answers. I retired from a government job four years ago and was advised to split my super into two (I only had 20 years of super like most women of my age, and I was a single parent and am now a single retiree paying 100 per cent of the bills).
I was told by financial advisers, including one at Centrelink, I would get a Centrelink fortnightly part Age Pension if I did it this way.
A. A defined benefit scheme is where your employer agrees to pay you a pension based on certain contributing factors, rather than the amount invested in superannuation.
These factors vary between funds, but, in general, they are based on:
- your average salary pre-retirement
- how long you have worked for your employer
- your age.
Changes will take place to the way Centrelink addresses the income from such schemes.
Centrelink will cap the deductible amount, also known as the tax-free component, from such schemes to 10 per cent – the deductible amount is the amount that is not assessed as income.
For example, if you receive an income from a defined benefit scheme of $50,000 each year and the tax-free component is $7000, then your assessable income will be $43,000.
Under the new rules, which take effect from 1 January 2016, only an amount equivalent of 10 per cent of the annual income can be excluded from the income test. For example, 10 per cent of $50,000 is $5000, therefore your assessable income is $45,000.
You can find out more at Humanservices.gov.au
I’m sure the information you were given was correct at the time, but as rules change, it is important to keep your financial plan up to date by having regular reviews.
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